Nearby Comex gold is at $1,019 as I type this on Wednesday morning. Bloomberg explains the gold action as follows:

Sept. 16 (Bloomberg) -- Stocks climbed around the world and commodities advanced as Federal Reserve Chairman Ben S. Bernanke indicated the recession is over and billionaire investor Warren Buffett said he’s buying equities.

Somehow this reminds me of a line from Brave New World: "Ford's in his flivver and all's right with the world."

Club 1033 (the gold bugs' clubhouse) needs to call an urgent meeting. Our name might become obsolete! How about "Club Infinity"? After all, that's the mathematical result of dividing by zero (the long-term value of the 'dollar').

Here's a second explanation of the dollar's weakness, which I find more intuitively appealing:

Sept. 16 (Bloomberg) -- Investors turned the most bearish on the dollar in 18 months as signs of a recovery in the global economy reduced demand for the currency as a refuge, a survey of Bloomberg users showed.

The world’s main reserve currency will fall and Treasury yields will rise over the next six months, according to 1,851 respondents in the Bloomberg Professional Global Confidence Index. Their outlook on the economy improved for a second month, after saying it worsened every month since the index began in November 2007.

The U.S. Dollar Index fell yesterday to the lowest level in a year as a decline in foreign-exchange price swings encouraged investors to borrow the currency at record low interest rates to finance the purchase of assets in countries offering yields as much as 8.1 percentage points higher than deposit rates in America.

“You’ve had a lot of people being in the dollar that are going to exit when it isn’t a necessity as a safe haven,” said Fabian Eliasson, a survey participant and head of U.S. currency sales at Mizuho Corporate Bank Ltd. in New York. Eliasson said he expects the dollar to weaken.

It was baffling to watch the dollar stay aloft during 2008, as the Fed doubled the monetary base. The 'safe haven' theory would help explain how that counterintuitive result could happen. But if safe-haven appeal is waning, it implies the dollar's drop should accelerate now.

The carry trade is coming back alive, and the dollar is the new yen, as it were. We're turning Japanese, I really think so.

CNBC.com reports Warren Buffett says that while the economy "hasn't gotten worse" but also hasn't "gotten much better" over the past three months, he doesn't expect a 'double-dip' recession and sees significant improvement in residential real estate. In a taped interview, Buffett says he looks at a number of indicators, including data from Berkshire Hathaway companies, and "we have not bounced -- but we've quit going down." Unless there's some "horrible event," Buffett thinks the odds are "very much against" another significant downturn for the overall economy in the near future. He also sees "important" signs of life for housing: "I think we're certainly—we're through the worst of it in residential real estate in all probability. And-- and-- and the reason is we're building a lot fewer houses and we're-- and we're forming households, so that solves itself over time. Doesn't do it in a day or a week, but it solves itself. So we're further on that." CNBC's Becky Quick also asked Buffett about Kraft Food's (KFT) $16 billion bid for Cadbury (CBY), since Berkshire Hathaway is Kraft's biggest shareholder. While he says he's not opposed to the offer and has confidence in Kraft's management, he does think the bid is at a "pretty full" price, and Kraft will have to "do a lot of things right to justify this price."

The carry trade is coming back alive, and the dollar is the new yen, as it were. We're turning Japanese, I really think so.

MH,

At this point, that certainly is looking more and more probable. I have some questions regarding this if you wouldn't mind "filling in the blanks" for me.

Wouldn't a carry trade with the dollar actually increase the demand for the dollar, irrespective of its reserve currency status?

Wouldn't the inevitable unwinding of this carry trade, which is likely many years away, also increase demand for the dollar?

Could you infer from this that the future perfomance of US stock exchanges would roughly track the performance of the Nikkei over its recent history?

It does indeed look like the USD has broken support, and that the downtrend established in 2002-3 is still intact. But isn't this exactly what one would expect just prior to another de-leveraging event? This particular time period feels uncannily like pre-crash 2008 does it not?

Given that every central bank in the world has a vested interest in suppressing the price of gold, how can gold be viewed as a safe-haven "currency"?

Thanks for your time and educational effort on this MH (and anyone else)....Jeff

Dollar at risk of steep drop vs. yen

September 16, 2009: 6:32 AM ET

TOKYO (Reuters) -- The yen may surge against the dollar in coming days if it breaks through the ¥90 level, with traders worried that a complacent market may be caught off guard and add fuel to a sharp move.

A confluence of factors -- a new government stepping in with a hands-off view on currency intervention and a long holiday weekend in Japan -- is leaving the dollar prone to a deeper drop, possibly even beyond the 14-year low of ¥87.10 hit earlier in the year.

"A move below ¥87.20 runs the risk of a sharply accelerating move," said Gerrard Katz, head of North Asia foreign exchange trading at Standard Chartered in Hong Kong. He said some players were not as exposed at these levels as last year.

The yen pushed higher on Wednesday after incoming Finance Minister Hirohisa Fujii made clear he was not prepared to step into the market, saying he is opposed to intervention unless the market is volatile and he sees the current rise as rapid.

One senior FX options dealer in Tokyo is even staying close to town during next week's five-day break through next Wednesday, fretting that there could be a disorderly dollar fall below ¥90 because so many market players are not expecting such a move.

The carry trade is coming back alive, and the dollar is the new yen, as it were. We're turning Japanese, I really think so.

+1 for the obscure 80's music reference

Getting back on topic, has anyone seen any sign or activity of major financial players (central banks and others) attempting to push down the price of gold these past few weeks? I'm curious to know if this rise is happening due to the lack of recent intervention thus far, or if the rise is happening despite the intervention. If I had to guess I'd pick the former.... I imagine if I were in their shoes I might wait for it to approach the record mark and THEN drop the hammer, hoping to maximize the fear of a large correction and 'spook the herd' as it were.

JAG, to use the dollar as the base of the carry trade, you borrow dollars at the current fractional-percent US short-term rates. Then you purchase a foreign currency to get access to higher-yielding assets denominated in the foreign currency. To buy a foreign currency, you sell dollars. So opening the carry trade transaction produces selling pressure on the dollar.

As you stated, closing out the transaction later will produce upside pressure on the dollar, as the foreign currency is sold and the dollars are bought back to pay off the loan. However, the carry-trader hopes for a double play: not only to earn a higher yield in the foreign currency, but also to buy back the dollar at a more depreciated exchange rate than when it was sold.

The notion of a dollar-based carry trade is horrifying. From the Nineties on, the yen carry trade had a huge distorting effect on world markets. And yet the J-yen has only a small market share in global reserves.

But the dollar is the 'universal solvent' of the fiat currency world -- the largest reserve holding, convertible into any currency. A dollar-based carry trade would produce a global Bubble III of monstrous proportions -- what Mick Jagger used to call “a bleedin' volcano.“

The carry trade is coming back alive, and the dollar is the new yen, as it were. We're turning Japanese, I really think so.

MH,

At this point, that certainly is looking more and more probable. I have some questions regarding this if you wouldn't mind "filling in the blanks" for me.

Wouldn't a carry trade with the dollar actually increase the demand for the dollar, irrespective of its reserve currency status?

Wouldn't the inevitable unwinding of this carry trade, which is likely many years away, also increase demand for the dollar?

Could you infer from this that the future perfomance of US stock exchanges would roughly track the performance of the Nikkei over its recent history?

It does indeed look like the USD has broken support, and that the downtrend established in 2002-3 is still intact. But isn't this exactly what one would expect just prior to another de-leveraging event? This particular time period feels uncannily like pre-crash 2008 does it not?

Given that every central bank in the world has a vested interest in suppressing the price of gold, how can gold be viewed as a safe-haven "currency"?

Thanks for your time and educational effort on this MH (and anyone else)....Jeff

Jeff. Why do you think that this will remain successful, given the trend of vast diversification of physical gold and silver into strong hands?

This is unprecedented in recent history.

You know my thoughts on this. In my lifetime I think we will see a complete bust of the COMEX due to short squeezes that would make a garbage compactor feel like a love hug in comparison.

Who is it that is initially borrowing the USD and who specifically are they borrowing it from?

If the dollar is widely perceived as declining in market value, why would someone except it as payment for their assets within this carry-trade context?

A typical borrower might be a hedge fund. It borrows $100 million from its prime broker at the broker call rate of 2%. The hedge fund sells these dollars in the forex market, accepting 180 million Brazilian reals in payment. With these reals, the hedge fund buys the 3-year Brazilian Treasury note, which pays a fat 12.13% yield.

The difference in yields -- the arbitrage -- is more than 10%, or $10 million a year at the entry-date exchange rate. Three years later, if the exchange rate is the same, the hedge fund can take its interest-fattened balance of 253 million Brazilian reals, and buy back $141 million in dollars. After paying off the $100 million loan principal, plus $6 million interest, the hedge fund pockets $35 million on the closed carry trade.

However, if the dollar has depreciated to 1.50 reals three years later, the hedge fund receives $168 million when the trade is closed out, and pockets more than $60 million. Double play -- KA-CHING!

As to your second question -- the spot exchange rate for the dollar reflects an equilibrium between those who think the dollar will rise, and those who think the dollar will fall. Dollars will be accepted at this price, because it is the market-clearing price. One party to the transaction will gain, and the other will lose. But no one knows in advance which party is correct. Not everyone is a bear on the dollar.

Lots of people in the developing world still think the dollar is a rock-solid store of value. Neither you, nor me, nor the Crash Course will convince them otherwise. Only the complete collapse of the dollar will do that. Then they will angrily shake their fists at the CNN cameras -- 'America no good! Down with America!'

But the dollar is the 'universal solvent' of the fiat currency world -- the largest reserve holding, convertible into any currency. A dollar-based carry trade would produce a global Bubble III of monstrous proportions -- what Mick Jagger used to call “a bleedin' volcano.“

[+2 for 2nd obscure 80s music reference]

Thus the song, "Start me Up" in '81, referring to the printing presses.

If you start me up If you start me up I'll never stop If you start me up If you start me up I'll never stop I've been running hot You got me ticking gonna blow my top If you start me up If you start me up I'll never stop